Malaysian banking system's liquidity sound, says RAM Ratings

After the doldrums, the sector is expected to pick up momentum in the second half of next year with a recovery in, among others, oil prices as well as a clear direction on US policies especially on its interest rates

KUALA LUMPUR: The Malaysian banking system’s liquidity is sound as the liquidity coverage ratio (LCR) exceeds the minimum of 100%, says RAM Rating Services Bhd.

RAM Ratings’ co-head of financial institution ratings,  Wong Yin Ching said on Thursday the banking sector's Basel III LCR had averaged 125% since its implementation and stood at 128% as at end-January 2017.

She said this was despite a decline in surplus liquidity placed with Bank Negara Malaysia (BNM) over the past few years. 

While the industry’s average LCR exceeds 100% – the minimum requirement effective Jan 1, 2019 – some banks have yet to reach this threshold. 

“As these banks have to improve their LCRs to keep up with the regulatory requirement, we expect competition for retail and SME deposits to persist, due to a more favourable treatment under the LCR framework,” Wong said. 

Meanwhile, banks can also access BNM’s Restricted Committed Liquidity Facility (RCLF) to manage their LCRs. 

Introduced in August 2016, the undrawn portion of the RCLF will qualify as high-quality liquid assets. 

In 2016, the banking sector’s deposit growth (including investment accounts from customers) remained lacklustre at 3.0% (2015: 2.3%). 

This is was due to competition from non-bank deposit-taking entities, weaker corporate profits and capital outflows. 

As deposit growth continued trailing lending expansion (+5.3% in 2016), the sector’s RAM-calculated loans-to-deposits (LD, including investment accounts from customers) ratio climbed to 87.2% as at end-January 2017 (end-December 2015: 85.4%). 

Given the weak deposit growth, banks have been tapping the debt capital markets (DCM) for funding, made possible by the depth of the domestic DCM and banks’ good access to bond markets abroad. 

“The Basel III regime has also fuelled bank issuance of capital instruments, which represent another source of long-term funding,” Wong said. 

The LD ratio of the eight domestic anchor banking groups was 91.7% at end-December 2016. 

This figure would come in at 84.1% if capital-market funding is taken into consideration (both figures include investment accounts from customers). 

“However, we observe that capital-market funding remains only a small part of the funding base of Malaysian banks relative to developed nations,” Wong noted.